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Silicon Valley News

Friday, November 26, 2010

Netflix, YouTube shape Web TV

Savvy investors watching the growth of streaming video and tuned into important developments in emerging Web TV platforms have been handsomely rewarded. During the past year, streaming video rental kingpin Netflix has one of the two best performing stocks with a market capitalization of at least $5 billion on the tech-filled Nasdaq exchange. Netflix and San Francisco networking upstart Riverbed - the only other tech stock keeping up with Netflix in the mid-cap category - are the two top holdings, respectively, of my Silicon Valley 2.0 portfolio, which is outperforming the S&P by over 27 percent annually.

Netflix and YouTube are the chief portals for streaming premium and popular content on a proliferating array of Web TV boxes. As such, they are shaping the early development of Internet television.

YouTube is the cornerstone of the Google TV platform. In an effort to gain access to premium content for YouTube, Google is, according to a New York Post report, negotiating a deal to obtain the digital rights to the famed Miramax library, which has over 700 films, including "Pulp Fiction" and "No Country For Old Men." Walt Disney Co. is expected to close a deal to sell Miramax to Filmyard on December 10. Google is talking to Filmyard about gaining access to the Miramax library. However, Google is not alone. Netflix has also shown an interest in the Miramax films in the past.

About two months ago, Google hired former Netflix executive Robert Kynci to head its efforts in Hollywood to secure premium content. Kynci was reportedly one of the chief architects of Netflix's popular streaming service. He also established a presence in Hollywood which Google now considers invaluable as it searches for content for its Internet TV service.

Ted Sarandos

Netflix is considered to be a model for how to work with the major studios. Its chief executive Reed Hastings, named "Businessperson of the Year" by Fortune magazine earlier this month, sent his content chief, Ted Sarandos, to Hollywood to cultivate relationships with the big studios.

"Unlike the companies that [tried to strike partnerships with the studios] before, we didn't make the mistake of relegating relationships to agents and lawyers to broker deals," Sarandos explains. "The same way we don't outsource our [intellectual property], we don't outsource our relationships ... It's our goal to be embedded into the studios' business and understand what drives their decision making. We do our best to be good partners."

In an apparent effort to stay competitive with Netflix, Hulu Plus, the streaming video service backed by Disney, Fox and NBC Universal, trimmed the price of its monthly subscription plan to $7.99 this month. In June, Hula began charging $9.99 a month for a premium service. The Hulu service is available on far fewer devices than Netflix.

Hulu executives are very upset by NBC Universal's decision last month to offer episodes of Saturday Night Live to Netflix the day after they air, according to Adweek. That deal set a precedent that does not bode well for Hulu. Before the SNL agreement, the major studios did not allow Netflix to rent or stream episodes from the current season. Streaming TV episodes the day after they aired had been an exclusive service offered only by Hulu.

Hulu is struggling to keep pace with Netflix in the content procurement battle. Netflix recently spent $1 billion in a content deal with Epix, the pay TV service operated by Viacom (Paramount). "Netflix is writing bigger checks than anyone else in the market," according to Justin Patterson, a senior analyst at Morgan Keegan and Company.

Hulu has projected revenue of about $240 million in 2010. Most of that goes to its partners, ABC, NBC and Fox. Hulu will have about $80 million left after revenue sharing.

Meanwhile, as part of an effort to upgrade its content, Google announced yesterday that it signed an agreement with three French royalty-collecting groups representing filmmakers, screenwriters and authors to pay artists when their works are shown on YouTube.

Two months ago, YouTube agreed to pay French composers when their songs are viewed on the website. Similar pacts have been made in Spain, Italy and England so that musicians and filmmakers can share YouTube advertising revenue generated from copyrighted material.

While YouTube continues its efforts to provide higher quality content, the overall Google TV service is experiencing growing pains. Reviews by Walter Mossberg of the Wall Street Journal and David Pogue of the New York Times have been harsh. Many who have reviewed the service say that it is not user friendly and will only be enjoyed by geeks in its initial development.